As architects, nearly everything we do is associated with a project. As a project-centric business, understanding which key performance indicators (KPIs) are meaningful is only half the battle. What is equally important is having a system in place that delivers real-time information, so the KPIs are accurate and actionable.Imagine you’re driving in your car and you look down at the fuel gauge on the dashboard. In most newer cars, not only would you see that you are low on fuel, but that you have only 17 miles left. That’s really helpful! You now know that you need to find a gas station within 17 miles or you will be stranded on the road. Your fuel KPI is critical and real-time. Now, imagine if the fuel level was only updated weekly. How comfortable would you be taking a road trip if you didn’t have a totally accurate reading of the fuel in the tank (or charge in the battery for our electric vehicle readers)?
Even if your car had a fuel gauge that was only updated weekly, the car has one advantage over your projects. When it runs out of gas, it stops dead in the road. You can’t go another inch. There is no denying you have run out of gas. The same can’t be said for your firm. Once we have used up the fees or budget for a project, our employees don’t stop working and sit motionless at their desk waiting for a tow truck to arrive.
This example demonstrates that knowing the KPIs is only as useful as your ability to believe that the data is accurate and real-time. Otherwise, you will be making decisions on conditions that existed a week or more in the past. In situations where the data is showing a problem, that means you are already a week or more late in your ability to address it.
As architects who are expected to create sustainable architecture for your clients, you owe it to yourself to create a sustainable firm first by implementing a system that gives you real-time KPIs. Considering every firm in the world is now operating as a distributed workforce, it is essential that you invest in a native-cloud system like BQE Core.
8 Essential KPIs for Architects to Measure Firm Growth
Once you have a great cloud-based system in place, then we can look at the KPIs the system should provide to ensure that your firm is performing as planned.
#1: OVERHEAD MULTIPLIER
The overhead multiplier is the cost of non-project-related expenditures (such as indirect expenses including indirect labor) expressed as a percentage of total direct labor.
This is one of the most vital KPIs because it’s required to accurately determine a firm’s profitability. A lower overhead multiplier means a higher profit margin and vice versa. Some firms choose to calculate overhead multipliers every quarter, while others do it annually. To calculate the overhead multiplier, follow the formula below:
Overhead Multiplier = Total Indirect Expenses / Total Direct Labor
If you want to reduce the overhead, you’ll need to manage indirect expenses more carefully. Aim to keep your overhead rate at or below 175% of total direct labor (also expressed as 1.75). If your overhead multiplier is greater than 1.75, you should take immediate action to resolve it.
#2: UTILIZATION RATE
The utilization rate is the percentage of hours spent on billable projects vs. the total number of hours worked.
Utilization is important for firms that charge their time to clients and need to maximize the productive time of their employees because it helps determine the overall productive use of an individual or firm.
The utilization rate illustrates the efficiency and overall performance of an employee by comparing an employee’s billable and non-billable hours. For example, if an employee logs 40 hours a week and 30 of those hours are billable, their utilization rate is 75%. To calculate utilization rate, follow the formula below:
Utilization Rate = Billable Hours Worked / Total Available Work Hours
If your rate is too high, you likely need to add more resources. When your rate is too low, it could mean you are not bringing in enough work. With BQE Core, your firm is able to look directly into an employee’s record and instantly see their utilization for any time period.
#3: EFFECTIVE COST RATE
An effective cost rate is the actual cost of each person’s employment based on the work they do.
This metric is important because it gives you a true picture of what an employee costs on an hourly basis, and it can help you determine what you should bill for each employee’s services to stay profitable.
Costs vary from job to job and project to project. Looking at the individual costs can give you valuable information about that job, but what about your employee’s overall performance? The effective cost rate shows you the average cost of an employee.
It is not enough to simply calculate the effective cost rate by combining your firm’s overhead multiplier with the employee’s hourly salary. For example, many firms would simply take an employee with an hourly salary of $60, where the firm has an overhead multiplier or 1.75 and think that the effective cost rate for the employee is $105 (60 x 1.75 = 105).
In BQE Core, we take this a step further by looking at the costs of the employee based on their utilized time. This is hugely important to think about: for every hour they perform utilized work, what do they actually cost your firm.
Effective Cost Rate = Cost Amount / Total Actual Hours Billed where Cost Amount = (Actual Hours x Cost Rate) of billed time
If your effective cost rate is high, it’s a sign you’re paying too much or your employee is spending too much time on non-billable work.
With BQE Core, you can look directly into an employee’s record and understand what their effective cost rate has been.
#4: NET MULTIPLIER
The net multiplier is the ratio of net operating revenue to total direct labor.
If you think of direct labor as an investment, the net multiplier is a measure of your return on this investment. It shows you how many dollars of revenue you generate for every dollar you spend on direct labor and measures your actual performance. To calculate net multiplier, follow the equation below:
Net Multiplier = Net Operating Revenue / Total Direct Labor
The net multiplier is a good gauge of your firm’s financial health. Your net operating revenue should be greater than total direct labor. If total direct labor is greater than net operating revenue, you should investigate why your costs are so high.
#5: WORK IN PROGRESS (WIP)
Work in progress (WIP) refers to the value of the billable hours and expenses that a firm hasn’t billed yet.
WIP is valuable in that it can help you forecast expected revenue. It can also help managers understand how far along work is, and firm owners can use WIP, along with their accounts receivables (AR), as a booster when applying for a commercial line-of-credit. Some firms track WIP as an asset on the balance sheet, and once invoiced, it shows up as revenue on the income statement.
You want to make sure you have a consistent cash flow. If one week’s WIP looks significantly lower than others, that could be a signal that not everyone is making the most of their time.
Some firms will require a more sophisticated calculation to determine WIP since not all projects bill hourly. It is quite normal for firms to have contracts that are based on a fixed fee or some other form of a stipulated sum (i.e. a percentage of the cost of construction). In situations like this, projects that are subject to this form of contract should look at their earned value (EV).
In order to understand the EV, solutions like BQE Core allow project managers to enter in a value that represents the level of completion they believe the project has achieved and will be used during invoicing. Therefore, your WIP report should separate out the projects that bill hourly—and for which WIP is easily calculated off timecard data—from those which invoice based on fixed fees.
With BQE Core, you can look at a group of projects and instantly see the value of WIP.
#6: AGED ACCOUNTS RECEIVABLE
Accounts receivable aging shows unpaid customer invoices and unused credit memos by date ranges.
This is a valuable tool when trying to determine which invoices are overdue for payment. Calculating your average aged accounts receivable will show you the average number of days it takes to get paid from the invoice date. To calculate your aged accounts receivable, use the following formula:
Aged Accounts Receivable = Annual Average Accounts Receivable / (Net Operating Revenue / 365 Days)
Architecture firms should do their best to collect all outstanding invoices within 30 days of the invoice date. If your average aged accounts receivable is greater than 30 days, it might be a signal that it’s time to reexamine your invoicing process and develop a better way of collecting what’s owed.
In BQE Core, your aged receivables can be easily monitored on your dashboard.
#7: PROFIT-TO-EARNINGS RATIO
The profit-to-earnings ratio indicates a firm’s effectiveness in completing projects profitably.
The profit-to-earnings ratio is determined by dividing the profit (after expenses and salaries have been accounted for but before non-salary distributions and taxes) by the net operating revenue. To calculate your profit-to-earnings ratio, use the following formula:
Profit-to-Earnings Ratio = Profit Before Distributions and Taxes / Net Operating Revenue
The higher the number, the more profitable your firm is. If your profit-to-earnings ratio is low, you could be spending too much internally.
#8: NET REVENUE PER EMPLOYEE
The net revenue per employee shows, on average, how much revenue each of your employees generates.
This metric is a meaningful analytical tool because it measures how effectively your firm utilizes its employees. It can also help you forecast a more realistic range for future annual net operating revenue. To calculate your net revenue per employee, use the following formula:
Net Revenue Per Employee = Company’s Net Revenue / Current Number of Employees
Compare your net revenue per employee against that of other companies in the same industry, or use it to look at changes within your company. If your average goes down, this means you’re generating less revenue per employee.
For example, imagine you had 10 employees and made $1,000,000 in revenue last year. Then this year, you have 20 employees, but you only made $1,500,000 in revenue. You have twice the workforce, but your revenue increased by only 50%. This is clearly a problem.
While net revenue per employee is a common KPI, BQE Core gives you much greater visibility into the revenue earned by each employee. Rather than just averaging out your revenue across your employee pool, having KPIs that show the actual revenue earned at the employee level takes your firm's insights into the stratosphere.